World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Wednesday, March 11, 2009

I’ve been talking lately about the supposed “cash on the sidelines.” Most of it resides in Treasuries and bonds. That’s keeping our debt supported and interest rates low. Pull that support to chase equities and that rug may be pulled out from under the debt markets.

The question becomes, is there enough money to keep all the prior bubbles in the air?

The answer is clearly NO. In order to do that, credit creation would have to continue to expand. It simply cannot because debt has saturated the people, corporations, and the government. The income from our productive outputs can no longer service all that debt.

Thus, there are choices to make. Sure, you can rally stocks, but where’s the money come from? Bonds? Other debt instruments?

As the following article demonstrates, bond holders are beginning to get nervous:

March 11 (Bloomberg) -- Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout.

U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

“The bond market is getting more scared every day,” said Gary Austin of PDR Advisors in Charlotte, North Carolina, who manages $450 million in fixed-income securities. “At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit.”

Debt investors are an attractive target because of the size of their holdings -- more than $1 trillion just at the four largest U.S. banks -- and because they’ve emerged almost unscathed so far. Since any reduction in debt at a bank helps boost capital ratios, members of Congress including U.S. Representative Brad Sherman, a California Democrat, say it’s time for bondholders to share the pain.

“These banks can go into receivership, shed their shareholders, shed or reduce the amount they owe to their bondholders and come back out much stronger institutions,” said Sherman, who sits on the House Financial Services Committee, in a statement to Bloomberg News. More U.S. capital might be offered as part of the package, he said.

Record SpreadYields relative to benchmark rates on bank bonds average a record 8.21 percentage points, 3.63 percentage points more than industrial companies’ debt, according to Merrill Lynch index data. Before August 2007, when the credit crisis began, bank bonds paid spreads less than industrial-related debt.

Standard & Poor’s, which cut Bank of America’s credit rating this month to A from A+, expects the Charlotte, North Carolina-based company to break even this year because it’s hobbled by losses on credit cards and home loans. If it posts a loss this year, more government assistance may be required, raising “the possibility that debt holders could then be required to participate,” S&P said in a report.

“It’s only intuitive that the government would contemplate the thought, ‘Why are we only putting this on the taxpayer?’” S&P credit analyst John Bartko said in a telephone interview.

Sagging PricesScott Silvestri of Bank of America and Danielle Romero Apsilos of Citigroup declined to comment. Bank of America won’t need further government assistance, Chief Executive Officer Kenneth Lewis said in a Feb. 25 interview. The U.S. government is examining ways to further stabilize New York-based Citigroup if needed, the Wall Street Journal reported yesterday, citing people it didn’t identify.

The concern among debt holders is reflected in Citigroup’s $789 million outstanding in 7.25 percent subordinated notes due in October 2010, which have dropped 17.9 cents in the past three weeks to 77 cents on the dollar, according to Trace, the bond- pricing service of the Financial Industry Regulatory Authority. That puts the spread over Treasuries of similar maturity at 25.2 percentage points. Bank of America’s 7.4 percent senior subordinated debt due in January 2011 traded yesterday at 80.1 cents, compared with 98.9 cents one month earlier.

Trust-preferred shares of Bank of America and Citigroup are trading at less than 30 cents on the dollar and yielding more than 25 percent because investors anticipate restructuring, said Tim Anderson, chief fixed-income officer at Riverfront Investment Group in Richmond, Virginia.

‘Worthless’“The current prices imply that the companies’ equity is worthless, the government’s investment is worthless and subordinated debt holders will lose some of their investment,” said David Darst, an analyst at FTN Equity Capital Markets in Nashville, Tennessee.

Citigroup, once the world’s biggest bank by market value, dropped below $1 in New York trading for the first time on March 6. The bank jumped 38 percent yesterday in New York trading to close at $1.45 after saying it was having its best quarter since 2007.

Investors shouldn’t increase holdings that lack explicit government guarantees because “extreme losses” could force senior creditors to share in bailout costs, JPMorgan Chase & Co. said in a March 6 report by analyst Srini Ramaswamy.

Forcing bondholders to take losses could drive the cost of capital higher for banks, said Thomas Atteberry, a portfolio manager at First Pacific Advisors in Los Angeles with $3.5 billion in fixed-income assets. That’s not all bad, he said, because it may help ensure banks don’t do the same kind of “sloppy” underwriting that set off the credit crisis.Investors who choose to lend money to banks like Citigroup, which Atteberry said was poorly run, “should share the pain of a business that’s having to write things off,” he said.

Bond holders in financial institutions are not going to allow equity holders to be in line in front of them. Before you see big losses here, equity is going to be zeroed.

Just this morning, TLT and other bond funds sat right on the verge of breaking to new recent lows in price and highs in yield. At the very moment they were about to break, equities peaked and began to correct. Is there a direct correlation? You bet. There is not enough money in the world to shoot stocks to the moon and to keep interest rates at zero.

If you allow the stock market to run, then eventually that will pressure interest rates and that will increase the cost of carrying all the debt that is still permeated throughout the system.

This is the crux of the problem and it’s NOT being addressed at all. That’s because the banks run the world and do not want to be the ones to default on the debt to clear the system of the very menace that they permeated the globe with. They would much rather push it onto the taxpayers… the same people who are ultimately responsible for the debt anyway. Default must happen to clear the system. It could have happened through bankruptcy, but again, the banks have passed laws to prevent YOU from defaulting on your debts through bankruptcy while at the same time going to you to bail them out from having to default on their own debts. Oh, and then if you’re a day late on a credit card payment, they jack you to 30% Guido usury rates.

Their proposed solution to reinflate the globe is to get CREDIT flowing again. Credit in this context sounds like a good thing – or so they want you to believe. But the flip side of extended CREDIT is that someone winds up with the DEBT. More credit/debt cannot happen now because incomes cannot service still more debt on top of the debt already there.

So, they talk about printing or “quantitative easing.” Buying one’s own debts is completely false. A sad, sad joke. Doing so does not do anything but rob the people via stealth tax. You need productive dollars to pay back debt… that or default are the only two ways to do it.

It’s the debt, stupid. The world is permeated with it, that’s what put our economy on the highway to hell…

AC DC – Highway to Hell:

But debt is just a symptom of the problem.

The root of the problem lies in our debt money system where the bankers are allowed to influence politicians and get laws and bailouts passed in their favor while ignoring the debts of the people. How is that allowed to happen? Money talks, “those with the gold make the rules.”

But guess what? They don’t even hold the gold anymore. The bankers are losing control because all they have is confidence in their system and that’s waning.

The bankers are still solidly in control though. Just this morning was a press conference where President Obama and Secretary of the Treasury, Tim Geithner, talked about the importance of the global economy. They are pushing credit and a free trading world, the very mantra of the central bank. How’s that agenda working for YOU?

Boy, how many times did you hear the word “WORLD” in there? How many times did they talk about you? Obama is a good salesman for them, but he is surrounded by the one world central bankers who are the ones responsible for permeating the world with credit – DEBT.

How about a world and money system based on competitive production instead of debt? I’m all for a free and open world as long as everyone is competing under the same rules and regulations. Once countries are saddled with IMF/central banker debt, they are then under their control and their future productivity and resources are turned over to the bankers. America is allowing this to happen to us. It’s not supposed to happen that way, people better start understanding the constitution and what our founders had in mind - My MONEY 'tis to thee...

You can bet your bottom that their plan will include more bank focused bailouts, more fiat money stimulus, and more “credit” pushed into the world in a massive way. Just remember that credit is debt.

Bonds, stocks, currencies… all of these things tie together. They all are influenced by credit/debt.

The ROOT of the problem is not the debt, that’s a symptom. The ROOT lays in the influence that central bankers and other corporations are allowed to exert on our political system. The Constitution and our founders saw this as a potential future issue, and boy, were they right about that. But I don’t think they could have dreamed in a million years that America would become so permeated with debt, or that our population could become so brainwashed and controlled by corporate influences. Now we’re getting to the heart of the matter: